Chapter 4: External Sector – Economic Survey 2025-26

$825.3B

Total Exports FY25 (All-time High)

$387.5B

Services Exports FY25 (Record)

$188.8B

Services Trade Surplus FY25 (Record)

$81B

Gross FDI Inflows FY25 (+13%)

$701.4B

Forex Reserves (Jan 16, 2026)

$135.4B

Remittances FY25 (World's Largest)

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1. Global Trade Dynamics — Fragmentation & Uncertainty

Key Shift: Hyper-Globalisation → Geostrategic Globalisation Three concurrent challenges: (1) Trade Policy Uncertainty from rising protectionism, (2) Strategic decoupling among major economies, (3) National security tools migrating into trade policy

TPU Index (Apr 2025): Rose by 1165.6% YoY — highest since January 1960

GEPU Index (Apr 2025): Rose by 228.2% YoY — highest since January 1997

Friendshoring: Trading with politically close countries — resurging in CY 2025
Nearshoring: Sourcing from geographically proximate countries — still below 2021 average
Trade Concentration increased in CY 2025 — accelerated trade growth among largest economies

Global Trade Performance 2025

IMF WEO October 2025 Forecast Global trade volume growth: 3.6% (CY 2025) → 2.3% (CY 2026)
(vs 3.5% in CY 2024)

GTPA Index (Global Trade Policy Activity) — developed by WTO + IMF — rose sharply in 2025, primarily driven by restrictive measures (tariffs) overtaking facilitation measures

Geopolitical Realignment Russia-Ukraine conflict, BRICS expansion, Quad, IPEF, India-Middle East-Europe Corridor — supply chains now evaluated on resilience, not just cost

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2. India's Merchandise Trade Performance

Exports

Metric	FY25	Apr–Dec FY26
Total Merch Exports	USD 437.7B	2.4% YoY growth
Non-petro, Non-gems	USD 374.3B (Historic High, 7.5% YoY)	+6.0% YoY
Telecom instruments	+51.2% YoY	—
Petroleum products	-24.7% YoY	—
Electronics goods	Strong growth	+35.1% YoY
Marine products	—	+15.5% YoY

Global Share of Merchandise Exports CY 2005: 1% → CY 2024: 1.8% (nearly doubled)
Global share of commercial services: 2% → 4.3% (more than doubled)

Imports & Trade Balance

FY25 Trade Deficit Merchandise imports: USD 721.2B (+6.3%)
Merchandise trade deficit: USD 283.5B (+17.6%)
Gold imports: +27.4% (gold price +38.2%)

Total Trade Balance FY25 Total exports: USD 825.3B | Total imports: USD 919.9B
Total trade deficit: USD 94.7B

Q1, Q2, Q3 FY26 each set highest-ever quarterly export records
Apr–Dec FY26: Total exports $634.3B (+4.3%), imports $730.8B (+4.9%)
India: 3rd in Global South for trade partnership diversity (score 3.2)
Economic Complexity Index (ECI) rank: 44th (2023, improved from 57th in 2013)
Complexity Outlook Index (COI): 2nd globally — huge untapped potential

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3. Agricultural Exports & PLI Sector Performance

Agricultural Exports

Performance FY20: USD 34.5B → FY25: USD 51.1B (CAGR 8.2%)
Share in merchandise exports: 11–14%
India: World's 2nd largest agricultural producer by value

Target: USD 100 Billion Combined agri + marine + food & beverage — achievable in next 4 years

Key Challenge: Frequent export bans/MEP (Minimum Export Prices) disrupt supply chains and cause foreign buyers to switch. "Export markets once lost are not easily recovered."

Policy Prescription: Use PDS, buffer stocks, Open Market Sale Scheme, Essential Commodities Act and Price Stabilisation Fund to stabilise domestic prices — without restricting exports.

PLI Sector Trade (FY21–FY25)

Overview PLI introduced April 2020 — 14 sectors
Export AAGR: 10.6% | Import AAGR: 12.6%

Sector	Export AAGR	Note
IT Hardware	77.2%	Import +11% — maturing
ACC Batteries	45.0%	Import +24.9%
Electronics	38.8%	Import +17.6%
Solar PV	23.9%	Import +155.4% (assembling)
Speciality Steel	22.5%	—
Telecom	1.5%	Import -18.5% — import substitution!
Automobiles	14.1%	—
Pharma	6.0%	USD 30.5B in FY25 (16x since FY01)

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4. Export Destination Diversification & Trade Agreements

US Tariff on India: 50% Effective Rate Among the highest imposed on any country. 6 rounds of India-US trade negotiations underway. US exempted 200+ Indian agri products (spices, tea, coffee) from elevated tariffs.

Sector-wise Diversification (Apr–Nov FY26)

Sector	US Export Growth	World Growth	Alternative Markets
Gems & Jewellery	-44.3%	+0.6%	UAE (+34.9%), Hong Kong (+23.4%)
Marine Products	-5.7%	+16.1%	Vietnam (+99.8%), Malaysia (+59.2%)
Auto Components	-6.8%	+6.0%	UAE (+84.5%), Germany (+33.5%)
Textiles	-6.1%	+0.3%	UAE, Nigeria, EU countries
Pharma	+0.8%	+6.5%	Nigeria (+58%), Mexico (+53.12%)
Leather	-2.6%	+0.6%	France, UK, UAE

Trade Agreements (Recent)

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India-UK CETA — Comprehensive Economic and Trade Agreement — concluded; gems & jewellery, textiles to benefit significantly

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India-Oman CEPA (18 Dec 2025) — 99.38% of India's exports duty-free; 97.96% tariff lines with immediate zero duty; all major labour-intensive sectors covered

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India-New Zealand FTA concluded December 2025

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India-US Trade Deal — 6 rounds of negotiations ongoing

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India-EFTA TEPA — USD 100B investment commitment (binding)

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Chile, Peru — FTA negotiations in progress

Export Promotion Mission (EPM) Unified, digitally-driven framework replacing fragmented schemes. RBI: extended export credit tenure to 450 days; repatriation period extended from 9 → 15 months.

Pharma Case Study: TRIPS Shock → Global Leadership (Lesson for India Inc.) When TRIPS (1995) ended reverse-engineering, Indian pharma: (1) Invested in R&D (₹1,250M FY94 → ₹209.8B FY19), (2) Diversified to US/EU via DMF/ANDA filings (14.5% → 48.7% of global DMFs by 2007), (3) Developed CRAMS (contract research) model, (4) Strategic M&A abroad. Result: Pharma exports: USD 1.9B (FY01) → USD 30.5B (FY25) — 16x growth.

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5. Services Trade — India's Comparative Advantage

Services Trade Data

Metric	FY24	FY25
Services Exports	—	USD 387.5B (+13.6% YoY, all-time high)
Services Imports	—	USD 198.7B (+11.4% YoY)
Services Surplus	USD 162.8B	USD 188.8B (all-time high)
Software exports growth	+2.3%	+7.3%

Services Surplus = 2/3 of Merchandise Deficit Services surplus USD 188.8B covered about two-thirds of merchandise trade deficit USD 283.5B in FY25

Apr–Dec FY26: Services exports USD 304B (+6.5%); Services surplus USD 151.7B = 61.1% of merchandise deficit

Software & GCC Leadership

Global Capability Centres (GCCs) Grew at 7% CAGR (FY20–FY25)
India: 2nd globally in AI skill penetration (score 2.5, behind US at 2.6)

Computer services: >2/3 of total software service exports
BPO: Most significant component of ITES exports
US share in software exports: 54.1% → 52.9% (diversifying to Europe)
Europe's share: 30.8% → 32.8%
GCC advantages: Talent, digital infra, SEZ tax holidays, startup ecosystem

Services vs Merchandise Export CAGR CAGR of services exports consistently exceeded merchandise exports — but manufacturing exports remain critical for BoP and currency credibility

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6. Balance of Payments — Current Account & Remittances

Current Account

CAD — H1 FY26 USD 15B (0.8% of GDP)
vs USD 25.3B (1.3% of GDP) in H1 FY25
Significant improvement!

India's CAD (-1.3% of GDP) compares favourably vs high-deficit peers: New Zealand (-7.7%), Australia (-3.6%), UK (-1.8%), Canada (-1.6%)

Strong net invisibles (services + remittances) keep CAD manageable despite merchandise deficit

Remittances

World's Largest Remittance Recipient FY11: USD 55.6B → FY25: USD 135.4B
(~3.5% of GDP in FY25)

H1 FY26: USD 73B (up from USD 64.7B in H1 FY25)

Top sources (FY24 RBI Survey):

US: 27.7% (now top contributor — shift to skilled workers)
UAE: 19.2% | UK: 10.8% | Singapore: 6.6%
Shift from GCC-dominated to AE-dominated remittances

Remittances > Gross FDI In most years, remittances surpassed gross FDI inflows — most dependable external funding

Net International Investment Position

India's NIIP -8.7% of GDP (Q2 CY 2025)
Improved from -10.1% (year ago) and -14.1% (5 years ago)
India: 11th largest debtor globally

World's largest creditor: Germany (overtook Japan in CY 2024 — first time in 34 years)

World's largest debtor: US (NIIP -USD 26.1T)

Assets/Liabilities ratio improved: 74.1% → 77.5% (Mar 2024 → Mar 2025)

External Debt (Sep 2025) USD 746B; Debt-to-GDP: 18.4% (well below global peers)
External debt = <5% of India's total government debt

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7. Foreign Direct Investment (FDI) — Flows, Returns & Strategy

FDI Data

Gross FDI Inflows FY24: USD 71.3B → FY25: USD 81.0B (+13%)
Apr–Nov FY25: USD 55.8B → FY26: USD 64.7B (+16%)

Equity inflows FY25: USD 51B — ~60% to services, IT, trading, renewables, construction, auto
Greenfield rank: 4th globally (1,080 projects, CY 2024)
India: Largest destination for greenfield digital investments (CY2020–2024): USD 114B — ahead of Malaysia (74B), Singapore (39B)
Net FDI improved: USD 0.8B → USD 5.6B (Apr–Nov FY26) — nearly 7x

Returns on Inward FDI: ~7.3% (2014–2023) Higher than Thailand (7%), Brazil (6.1%), Mexico (4.3%), Germany (3%), US (2.9%)
Risk-adjusted return: India ranks 2nd only to Indonesia among major economies

FDI Challenges & Way Forward

"Connector Countries" Competition Vietnam, Malaysia, Mexico, Poland, Indonesia positioned as connector countries with PM-level investment bodies, tax holidays, Golden Pass schemes

India's FDI Strategy Needs:

PM/senior-level empowered institutional structure (like Vietnam's FIA, Malaysia's MIDA)
Single, empowered centre of accountability
Targeted GVC anchor strategy with customised, time-bound solutions
Predictability: every policy change must pass necessity test
Improve logistics (World Bank LPI rank: 38th in 2023)
Leverage India-UK CETA + India-EFTA TEPA (USD 100B investment commitment)
Leverage Bilateral Investment Treaty with Israel

Outward FDI (ODI) FY24: USD 14.4B → FY25: USD 23.6B
Top destinations (Apr 2023–Aug 2025): Singapore (27%), US (16%), UAE (10%), Mauritius (9%)
India in IDP Stage III — increasingly capability-seeking investments

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8. Foreign Exchange Reserves & Exchange Rate Dynamics

Foreign Exchange Reserves

Forex Reserves (Jan 16, 2026) USD 701.4B (up from USD 668.3B at end March 2025)
Import cover: ~11 months
Covers: 94% of external debt (Sep 2025)

Component	Mar 2025	Jan 16, 2026
Foreign Currency Assets (FCA)	USD 567.6B	USD 560.5B (slightly lower)
Gold	USD 78.2B	USD 117.5B (sharp rise — valuation + CB buying)
SDRs	—	USD 18.7B
IMF Reserve Position	—	USD 4.7B

Rising gold share aligns with global CB trend of diversifying away from dollar reserves amid geopolitical uncertainty

Exchange Rate Analysis

INR Depreciation (Apr 1, 2025 – Jan 15, 2026) ~5.4% against USD — one of the most depreciated alongside Japanese Yen (-5.5%)

Drivers of INR depreciation: FPI outflows, US tariff uncertainty, elevated US yields, hedging demand

Key Economic Finding (ARDL Regression) 1% appreciation of INR → net total trade declines by 1.26%
Merchandise trade elasticity: -1.45 (highly responsive)
Services trade elasticity: -0.38 (relatively inelastic — quality-driven)
Conclusion: Weaker rupee good for India's trade balance; benefits outweigh financial channel costs

Long-term Currency Credibility (East Asia Lesson) Durable currency strength comes from manufacturing export competitiveness + productivity, NOT from financial engineering. Japan, Korea, Taiwan currencies strengthened after current account surpluses emerged from manufacturing exports.

📚 Key Concepts Explained — Chapter 4

Friendshoring vs Nearshoring

Friendshoring: Trade with politically aligned countries (measured by UN voting patterns). Nearshoring: Sourcing from geographically close countries. Both reflect new logic in global trade beyond cost efficiency — driven by security, resilience, and strategic autonomy.

TPU Index & GEPU Index

Trade Policy Uncertainty (TPU): Fed Reserve media analysis of 7 newspapers for trade uncertainty mentions. GEPU: GDP-weighted average of 18 countries' national EPU indices. In April 2025, TPU rose 1165.6% YoY (highest since 1960!) and GEPU rose 228.2% YoY — unprecedented.

Economic Complexity Index (ECI)

Harvard Atlas metric measuring knowledge embedded in a country's exports — based on diversity and ubiquity of products. India ranks 44th (up from 57th in 2013). But India's Complexity Outlook Index (COI) is 2nd globally — meaning many complex products are within India's capability reach.

Balance of Payments (BoP)

Current Account: Trade in goods + services + remittances + income. Capital Account: FDI + FPI + ECBs. CAD (Current Account Deficit): India at 0.8% of GDP (H1 FY26) — manageable. Services surplus + remittances offset merchandise deficit.

Voluntary Retention Route (VRR) & FAR

VRR: FPIs invest in Indian debt with condition of retaining 75% for min 3 years — provides stability. FAR (Fully Accessible Route): FPIs, NRIs, OCIs can invest in designated G-Secs (FAR bonds) without quantitative caps or repatriation limits. Both stabilise debt FPI flows.

Investment Development Path (IDP)

Dunning framework: Countries evolve from net FDI recipients (Stage I-II) to net outward investors (Stage IV-V) as capabilities mature. India is in Stage III — increasing outward investments in technology-intensive sectors (capability-seeking), while still being major FDI recipient.

NIIP (Net International Investment Position)

Difference between a country's external assets and external liabilities. Positive = net creditor (Germany, China, Japan, Switzerland). Negative = net debtor (India at -8.7% of GDP, US at massive -USD 26.1T). India's NIIP improving from -14.1% GDP (5 years ago) to -8.7%.

Connector Countries

Geopolitically aligned nations that serve as conduits in trade/investment flows between major blocs (US-China). Examples: Vietnam, Malaysia, Mexico, Morocco, Poland, Indonesia — attracting FDI through PM-level engagement, tax holidays, streamlined approvals, industrial zones. India competes with all of these.

GTPA Index

Global Trade Policy Activity Index by WTO + IMF — captures trade policy changes using Dynamic Factor Model across 197 countries. Distinguishes facilitation measures (reducing barriers) vs restrictive measures (tariffs, quotas). In 2025, restrictive measures dominate — unlike pandemic when both rose together.

India-Oman CEPA (Dec 2025)

Comprehensive Economic Partnership Agreement signed 18 Dec 2025. India offers: 99.38% of exports duty-free to Oman; 97.96% tariff lines zero-duty immediately; covers all major labour-intensive sectors. Oman offers: 94.81% tariff liberalisation for Indian imports. Also: enhanced mobility framework for Indian professionals.

TRIPS & Pharma Transformation

TRIPS (1995) mandated 20-year product patents — ended India's reverse-engineering model. Indian pharma responded: R&D investment, DMF/ANDA filings (14.5%→48.7% global share), CRAMS model, strategic M&A. Result: Exports USD 1.9B (FY01) → USD 30.5B (FY25). Template for India Inc. facing US tariff challenges.

Transfer Pricing & Customs Convergence

Currently, related-party imports are examined separately by income-tax (transfer pricing) and customs authorities — causing double compliance. Both use arm's-length principle (OECD + WCO standards). Survey recommends coordinated convergence approach: aligned methodologies, converged documentation, joint review — reducing compliance burden and improving ease of doing business.

🎯 UPSC Prelims Practice MCQs — Chapter 4

Q1. India's total exports in FY25 amounted to USD 825.3 billion. Which component was the PRIMARY driver of this record performance?

A) Merchandise exports (petroleum products)

B) Services exports (+13.6% YoY to USD 387.5B)

C) Agricultural exports

D) Electronics and telecom instruments

✅ Correct: B) Services exports drove total export growth — reaching USD 387.5B (+13.6%), an all-time high. Merchandise exports were flat; petroleum products actually declined by 24.7%.

Q2. The Trade Policy Uncertainty (TPU) Index in April 2025 registered a year-on-year increase of approximately:

A) 228.2%

B) 500%

C) 1165.6%

D) 350%

✅ Correct: C) The TPU Index rose by 1165.6% YoY in April 2025 — the highest since January 1960. GEPU rose by 228.2% YoY, its highest since January 1997. Both reflect unprecedented trade uncertainty from US tariffs.

Q3. In which PLI sector did India achieve the most successful import substitution, with exports growing while imports DECLINED?

A) Electronics (export +38.8%, import +17.6%)

B) IT Hardware (export +77.2%, import +11%)

C) Telecom (export +1.5%, import -18.5%)

D) Solar PV (export +23.9%, import +155.4%)

✅ Correct: C) Telecom achieved the "early accomplishment in import substitution" with exports growing while imports declined by 18.5% AAGR (FY21–FY25) — the ideal outcome of PLI policy.

Q4. India's foreign exchange reserves as of January 16, 2026 stood at USD 701.4 billion, providing how many months of import cover?

A) 8 months

B) 9 months

C) ~11 months

D) 14 months

✅ Correct: C) India's forex reserves as of Jan 16, 2026 were sufficient to cover approximately 11 months of goods imports and about 94% of total external debt outstanding at end-September 2025.

Q5. Which country is the TOP source of remittances to India (according to RBI's 6th round Survey on Remittances for FY24)?

A) UAE (19.2%)

B) United States (27.7%)

C) Saudi Arabia

D) United Kingdom (10.8%)

✅ Correct: B) The US is now the top contributor (27.7%), reflecting the shift from GCC-dominated (blue-collar workers) to AE-dominated remittances (skilled/professional workers). Sequence: US (27.7%), UAE (19.2%), UK (10.8%), Singapore (6.6%).

Q6. The India-Oman Comprehensive Economic and Partnership Agreement (CEPA) was signed on which date?

A) December 10, 2025

B) November 12, 2025

C) December 18, 2025

D) January 5, 2026

✅ Correct: C) India-Oman CEPA signed 18 December 2025. Key features: 99.38% of India's exports duty-free; 97.96% tariff lines with immediate zero duty; all major labour-intensive sectors covered; enhanced mobility for Indian professionals.

Q7. According to Economic Survey 2025-26, what percentage of India's GDP does external debt represent (as of September 2025)?

A) 28.4%

B) 18.4% (approximately)

C) 35.2%

D) 12.1%

✅ Correct: B) India's external debt-to-GDP ratio was approximately 18.4% (end-December 2024 basis), well below many large economies. External debt as of Sep 2025 stood at USD 746B, and crucially, <5% of the government's total debt.

Q8. India ranked __ globally in greenfield digital investments between CY 2020 and CY 2024, attracting USD 114 billion:

A) 1st (largest destination)

B) 2nd

C) 4th

D) 6th

✅ Correct: A) India was the largest destination for greenfield digital investments (CY2020–CY2024) at USD 114B — ahead of Malaysia (USD 74B), Singapore (USD 39B), Vietnam (USD 32B). India ranked 4th overall for greenfield projects in CY 2024 with 1,080 projects.

Q9. An ARDL regression analysis in Economic Survey 2025-26 found that a 1% appreciation of the Indian Rupee leads to what change in net total trade?

A) +0.87% improvement

B) -1.26% decline

C) -0.38% decline

D) -1.45% decline

✅ Correct: B) Net total trade declines by 1.26% for every 1% rupee appreciation (NEER elasticity). Merchandise trade: -1.45%. Services: -0.38% (inelastic — quality-driven). Conclusion: Weaker rupee benefits India's trade balance; merchandise gains outweigh financial channel costs.

Q10. India's Net International Investment Position (NIIP) as % of GDP improved to -8.7% in Q2 CY 2025, from -14.1% five years earlier. This means India is a:

A) Net creditor to the world (positive NIIP)

B) Net debtor, but improving significantly (11th largest debtor globally)

C) Net creditor with improving position

D) The world's largest net debtor

✅ Correct: B) NIIP negative = net debtor. India ranks 11th largest debtor globally. But NIIP improved from -14.1% (5 years ago) → -10.1% → -8.7% GDP. World's largest debtor: US (NIIP: -USD 26.1T). World's largest creditor: Germany (overtook Japan in CY 2024).

Topper IAS · Economic Survey 2025-26 · Chapter 4: External Sector — Playing the Long Game

Source: Ministry of Finance, GoI · Prepared for UPSC Prelims 2026